Ch 6. Inventories

Lower of cost or market basis (LCM)

A basis whereby inventory is stated at the lower of either its cost or its market value as determined by current replacement cost

Retail inventory method

A method for estimating the cost of the ending inventory by applying a cost-to-retail ratio to the ending inventory at retail.

Gross profit method

A method for estimating the cost of the ending inventory by applying a gross profit rate to net sales and subtracting estimated cost of goods sold from cost of goods available for sale.

Inventory turnover

A ratio that measures the number of times on average the inventory sold during the period; computed by dividing cost of goods sold by the average inventory during the period.

Specific identification method

An actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory.

215,000

As a result of a thorough physical inventory, Railway Company determined that it had inventory worth $180,000 at December 31, 2014. This count did not take into consideration the following facts. Rogers Consignment store currently has goods worth $35,000 on its sales floor that belong to Railway but are being sold on consignment by Rogers. The selling price of these goods is $50,000. Railway purchased $13,000 of goods that were shipped on December 27, FOB destination, that will be received by Railway on January 3. Determine the correct amount of inventory that Railway should report.

overstated, understated

Atlantis Company's ending inventory is understated $4,000. The effects of this error on the current year's cost of goods sold and net income, respectively, are:

Weighted average unit cost

Average cost that is weighted by the number of units purchased at each unit cost.

Raw materials

Basic goods that will be used in production but have not yet been placed into production.

121.7

Carlos Company had beginning inventory of $80,000, ending inventory of $110,000, cost of goods sold of $285,000, and sales of $475,000. Carlos's days in inventory is:

cost of goods purchased

Cost of goods available for sale consists of two elements: beginning inventory and: *ending inventory. *cost of goods purchased. *cost of goods sold. *All of the above.

Consistency concept

Dictates that a company use the same accounting principles and methods from year to year.

perpetual vs. periodic inventory system

Factors that affect the selection of an inventory costing method do not include: *tax effects. *balance sheet effects. *income statement effects. *perpetual vs. periodic inventory system.

FOB (free on board) shipping point

Freight terms indicating that ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.

FOB (free on board) destination

Freight terms indicating that ownership of the goods remains with the seller until the goods reach the buyer.

Consigned goods

Goods held for sale by one party although ownership of the goods is retained by another party.

b

Harold Company overstated its inventory by $15,000 at December 31, 2013. It did not correct the error in 2013 or 2014. As a result, Harold's stockholders' equity was: (a) overstated at December 31, 2013, and understated at December 31, 2014. (b) overstated at December 31, 2013, and properly stated at December 31, 2014. (c) understated at December 31, 2013, and understated at December 31, 2014. (d) overstated at December 31, 2013, and overstated at December 31, 2014.

lower net income than FIFO

In periods of rising prices, LIFO will produce: *higher net income than FIFO. *the same net income as FIFO. *lower net income than FIFO. *higher net income than average-cost.

FIFO

Inventory costing method that assumes that the costs of the earliest goods purchased are the first to be recognized as cost of goods sold.

LIFO

Inventory costing method that assumes the costs of the latest units purchased are the first to be allocated to cost of goods sold.

Average-cost method

Inventory costing method that uses the weighted-average unit cost to allocate to ending inventory and cost of goods sold the cost of goods available for sale.

Just-in-time inventory method (JIT)

Inventory system in which companies manufacture or purchase goods just in time for use.

Perpetual

Inventory system in which: FIFO cost of goods sold will be the same as in a periodic inventory system

Finished goods inventory

Manufactured items that are completed and ready for sale.

Days in inventory

Measure of the average number of days inventory is held; calculated as 365 divided by inventory turnover ratio.

16,000

Rickety Company purchased 1,000 widgets and has 200 widgets in its ending inventory at a cost of $91 each and a current replacement cost of $80 each. The ending inventory under lower-of-cost-or-market is:

30,000

Songbird Company has sales of $150,000 and cost of goods available for sale of $135,000. If the gross profit rate is 30%, the estimated cost of the ending inventory under the gross profit method is:

Work in process

That portion of manufactured inventory that has been placed into the production process but is not yet complete.

Current replacement cost

The current cost to replace an inventory item.

Goods held on consignment from another company

Which of the following should not be included in the physical inventory of a company? *Goods held on consignment from another company. *Goods shipped on consignment to another company. *Goods in transit from another company shipped FOB shipping point. *None of the above

d

Which of these would cause the inventory turnover ratio to increase the most? (a) Increasing the amount of inventory on hand. (b) Keeping the amount of inventory on hand constant but increasing sales. (c) Keeping the amount of inventory on hand constant but decreasing sales. (d) Decreasing the amount of inventory on hand and increasing sales.